Pilbara Minerals – The Lithium Rush is On! (May 06, 2016)

Pilbara

Last night, shares of Pilbara Minerals (PLS.AX) hit record highs, closing at A$0.70/share. For anyone who has been following the lithium story most recently, you will know that Western Australia is the place to be if you’re out hunting for spodumene (hard rock lithium).

Here is the share price performance of PLS.AX over the last year:

PLS.AX Chart

That’s right… You are looking at what was previously trading at A$0.05/share that has now rocketed up to A$0.70/share in the span of just 1 year! Can you say 10-bagger+? As readers of this blog well know, I’m not particularly fond of chasing after stocks as they are blasting off out into outer space… Rather, I prefer to focus on deep value whenever I can.

But I don’t limit myself, and I never set any hard and fast rules that I must adhere to as an investor. And you shouldn’t either. Yes, there are times when chasing after deep value makes the most sense (gold and silver in 2015), and there are other times when you just want to hitch a ride on the next revolution, which I believe is most certainly the case with lithium in the upcoming decade.

We had the smartphone revolution (2007-2015).

All hail the electric vehicle (EV), which will drive forward the wave of the future, no doubt… The wheels are already in motion, and there’s nothing you, me, or anyone else can do to stop it at this point…

Sure, there will always be technological innovations, but the lithium battery isn’t something new… Sony released the world’s first commercial lithium-ion battery way back in 1991… Yes, something will eventually come along and dethrone lithium (probably), but look how long it took lithium-ion to even gain mass adoption. For all the skeptics out there who believe in hydrogen fuel cells, or whatever else you think is the “next big thing”, you must realize that you don’t build out infrastructure overnight. It took decades for lithium-ion to catch on… Do you really think something new and breathtaking will emerge onto the scene and become economically viable (and scalable) over the next 5-10 years?

If so, don’t invest in lithium… Otherwise, maintain the perspective of an investor who is out trying to make money… You don’t need more than 5 years for this speculation (trade) to play out brilliantly in your favor! I sure as hell don’t plan on holding onto these stocks for more than 5 years

Why waste your time trying to fight an unstoppable force?

From Pure Energy Minerals:

Battery Demand

You might as well join ranks with em’ and try to squeeze out a juicy profit along the way…

No, I don’t like chasing stocks, but if I must do so, I much prefer to go shopping for them sooner rather than later

And right now, we are in the very, very early stages of the lithium boom… Tesla’s Model 3 isn’t even in production yet, for crying out loud… However, don’t think for one second that real demand isn’t there for an affordable EV (~$35,000) catered to the masses.

From The Verge:

Preorders

400,000 preorders (and counting) for Tesla’s Model 3, already!

Elon Musk (as usual) has some pretty lofty goals, and he has now escalated the timeline on when to hit 500,000/year EV production.

From RawStory:

Screen Shot 2016-05-06 at 11.12.28 AM

No, Tesla is by no means close to telling the entire story when it comes to EVs… not by a long shot…

From Nemaska Lithium:

Factories

Lithium-ion Megafactories:

  • LG Chem (capacity 7 GWh)
  • Tesla (capacity 35 GWh)
  • Foxconn (capacity 15 GWh)
  • BYD (capacity 20 GWh)
  • Boston Power (10 GWh)

As always, don’t go sleep on the Chinese, that’s where the bulk of the world’s demand is going to come from. But because the Tesla brand is so ubiquitous (and sexy) these days, I would be remiss if I didn’t at least give them their due credit… Back in 2013, I started tuning into the Tesla story, and really believed that if anyone out there could pull off massive success with the Model S, it was Elon Musk… Sure, I still think TSLA stock is grossly overvalued at this time (I’ve lost money trying to short it before, believe me I’ve tried), but at the end of the day, I would never bet big money against Elon Musk; if anyone can pull this off, it’s him.

Increasing production fivefold over the next two years will be challenging and will likely require some additional capital, but this is our goal and we will be working hard to achieve it,” Tesla founder and chief executive Elon Musk said Wednesday in a letter released with a quarterly earnings report.

 

But as you’re probably well aware, the lithium revolution extends far beyond just electric vehicles.

From Pure Energy Minerals:

Generation

From Albemarle:

Trends

Yup, not only do you have rapid growth in transportation, but a new growth market in grid storage, that is expected to increase capacity from 1.1 GW to 15 GW by 2025. And don’t forget about consumer electronics, which are expected to sport a very healthy 8-10% compounded annual growth rate (CAGR) over the next decade.

Seriously, do you know of any other sector out there that is poised for such explosive growth in the near future?!?

In short, the global marketplace is going to be requiring a lot, lot, lot more lithium than is currently being produced today.

From Albemarle:

Lithium Content

With that said, it might come as a surprise to you to learn that over 89% of the world’s supply of lithium comes from just 4 companies:

From Pure Energy Minerals:

Companies

Albemarle, SQM, and FMC are collectively often referred to as the “big 3”. But these are very well diversified companies (they produce much more than just lithium products), and thus they do not provide an investor with a “pure” lithium play, if that’s what it is that you’re looking for.

From Lithium-X:

Big 3

Tianqui Lithium is a Chinese company that owns 51% of the Greenbushes mine (Albemarle owns the other 49%) in Western Australia, the world’s flagship spodumene deposit that produces ~80% of the world’s spodumene supply.

Clearly, the market is going to demand more sources of lithium, to reduce dependence on any single entity, particularly when demand starts to go hyperbolic in the next decade or two.

So, how should an investor get situated to play this space?

Well, I’m just going to try and replicate the exact same strategy that I used to play the gold rush…

Invest in the best assets/companies first and foremost, and take a top-down approach…

Build a solid foundation before you go off speculating and chasing after potential “ten-baggers”, which will more or less be the early-stage exploration companies that may (or may not) be sitting on anything more than moose pasture. Don’t get me wrong, I’m all for speculation in hopes of hitting a home run, but you had better have some real legitimate assets in your portfolio first before you head down that route!

When it comes to world class lithium deposits, you can either go searching for brine (salars) or spodumene (hard rock)… I’m not picky, so I like to target both… I’m a big fan of diversification (not in the traditional sense, but within your best ideas; in this case, lithium stocks).

With Pilbara Minerals, it’s straight-forward as to why I want this stock to anchor my lithium portfolio.

From Pilbara Minerals:

Pilbara Comparison

Quite simply, I want to own the largest and highest-grade mineral deposits out there. To me, buying shares of PLS.AX is no different than when I was loading up BIG on Ivanhoe Mines (IVN.TO/IVPAF) last year… When the lithium boom (or copper, or zinc, or whatever) takes flight, the “best of the best” companies should be extremely well positioned to outperform their peer group.

And when it comes to lithium, outside of Greenbushes, the Pilgangoora project owned by Pilbara Minerals is the next best thing in the world for spodumene.

Pre-Fesability Study (PFS) highlights:

PFS

And that’s using yesterday’s spodumene prices ($456/t)… With demand for lithium skyrocketing, prices should only keep going up.

From Orocobre Limited:

Orocobre

I like Pilbara Minerals’ project because it’s already economical at today’s lithium prices. An IRR of 44% is incredible, and something that gold companies would kill for, even today… With the most recent A$100 million equity raise, the company should further be well positioned to put the mine into production, with construction probably slated to start either Q4 2016, or early 2017. Further, the initial CapEx of A$184 million is very modest, when compared to say an open pit gold mine… I’m hoping debt financing can help carry funding the rest of the way, as there are already enough shares of PLS.AX floating around out there, close to ~1 billion shares in total. As I’m observing, many Australian mining companies aren’t exactly known for maintaining a tight share structure. It’s just too bad that I missed out on the most recent Share Purchase Plan (SPP) @ A$0.38/share!

Arghh, the price one pays for being late to the party…

Anyway, if the price of lithium hydroxide and lithium carbonate keep climbing (there are claims of lithium carbonate being sold to the Chinese for as high as $20,000/t these days) steadily throughout the years, there’s no reason to believe why producers such as Pilbara Minerals won’t be able to “jack up the rents” on their concentrate products and profit even more handsomely along the way… If the market eventually does come to face a continual “short squeeze”, the converter companies will be sitting on some pretty FAT margins, so there should be plenty to go around, you would think…

From The Economist:

20160116_WBC063_0

It is not a big business: lithium accounts for only about 5% of the materials in some car batteries, and for less than 10% of their cost. Worldwide sales of lithium salts are only about $1 billion a year. But the element is a vital component of batteries that power everything from cars to smartphones, laptops and power tools. With demand for such high-density energy storage set to surge as vehicles become greener and electricity becomes cleaner, Goldman Sachs, an investment bank, calls lithium “the new gasoline”.

SQM is part of a global scramble to secure supplies of lithium by the world’s largest battery producers, and by end-users such as carmakers. That has made it the world’s hottest commodity. The price of 99%-pure lithium carbonate imported to China more than doubled in the two months to the end of December, to $13,000 a tonne.

From Nemaska Lithium:

Prices

The above numbers seem more conservative (realistic), which may better mimic reality than all these whispers on the street of $20,000/t prices… which may simply be a “one off” event that gets subdued once more resources get put into production. In any case, the trend for lithium prices should only be going up from this point forward.

 

Back to Pilbara Minerals, just this past Monday, the company reported excellent drill results, further expanding the potential of their exploration target to 130-150 Mt @ 1.2-1.5% Li2O.

The resource just keeps getting better and better… which is why shares are eclipsing new record highs seemingly everyday… As I alerted subscribers this past Tuesday, I loaded up and bought up another 21,000 shares @ A$0.63/share.

From Tuesday, May 03:

Subscribers Pilbara

Without a doubt, there will come a point in time when these stocks become grossly overvalued, I’m sure of it… It happens everytime there is a mania and everyone piles on in because the fear of missing out (FOMO) becomes overwhelming…

Right now, it’s still early stage enough where I think the risks are moderate if I overpay for some of these stocks… But in 2-3 years, man, it’ll be extremely treacherous to be throwing your money at these companies when I’m sure valuations will be at nosebleed levels!

 

That’s why I’m doing my homework now and getting well situated now…

 

I hate chasing after investments! When the crowds really rush in, I’ll probably start positioning myself to start selling off shares…

 

Buy low and sell high“… Don’t ever forget that!

 

Lastly, for anyone who thinks it’s nothing more than trivial putting new lithium projects into production, you are grossly mistaken… If Orocobre can be used as an example, ramping up to nameplate capacity can take a lot of time and effort!

From Albemarle:

Dev

There are only a handful of new projects slated to enter production in the next few years (Pilbara Minerals’ Pilgangoora mine should ramp-up sometime in 2018, not shown in slide above)…

Please Note: Galaxy Resources (GXY.AX) and partner General Mining (GMM.AX) have put the Mt. Cattlin mine into production (the above slide shows status as ‘Closed’).

 

So, yes, you do want to select your lithium stocks carefully, particularly any company that is close to construction and needs to raise capital to continue development…

 

Thanks for tuning in for this “preview” edition of my lithium updates… This update is just a “surface level” overview for anyone new to the sector… I’ll save the finer details for later, as I’m still very much learning and researching more myself… I’m still very green in this space, so it’ll take some time for me to get up to speed.

 

Fight On!

 

Photo Credit: Pilbara Minerals

Print Friendly, PDF & Email
Sharing is Caring:

12
Leave a Reply

avatar
6 Comment authors
Tracking the progress of the companies in my PortfolioLithium – Analyzing Both Supply and DemandFritzFI Fightergeorgehpuck Recent comment authors
  Subscribe  
newest oldest most voted
Notify of
Matt
Guest
Matt

Great stuff! What’s your view on Lithium X?

Jon
Guest
Jon

Good stuff as usual.

What are your top picks for the sector?

KT
Guest
KT

How do you feel about LIT ETF as a diversified play?

georgehpuck
Guest

Any Us traded companies you would recommend in Lithium?

I like the Lithium thesis, I am not as comfortable with buying shares on foreign exchanges.

Fritz
Guest

Hi, I like your summary on Pilbara, and yes, they’ve come up with additional reasonably good reserves, which is important for a longer-term growth story. Bit expensive now, so the rewards will be more 30-40% within (conservative) 6 months.
Lithium X has benefited from the management team, and their take-over of the Diabillios project (from Aberdeen). Other then that, I feel they are completely over-priced, as their Nevada project is only a land claim right now. In that area I feel that Dajin and Pure Energy have a lot more work done already. What strikes me though, why is PE not doing a lot better? And what’s your thought on Dajin?
Thanks, Fritz

trackback

[…] These days, the hype surrounding electric vehicles (EV) is rapidly growing, and naturally, you’re going to have your skeptics and doubters. There ain’t nothing wrong with that. Since I’m new to the space myself, I’ve been spending a lot of time reading articles, forums, research papers, etc., trying to learn more so that I can better understand the industry. As readers should be well aware by now, for the most part, I don’t like to write about topics that I know absolutely nothing about… If I do, then at least I’m open and honest with myself, admitting that I’m still very much a newbie and still learning as I go… For instance, I made the concluding remark as I finished up my first lithium article: […]

trackback

[…] Pilbara Minerals Ltd […]

Close Menu